New York Fed Says Core Inflation May Be at 3.5%, Not 4.6%

When it comes to inflation, understanding it can be complex as there are multiple definitions. And under one newer measure from the Federal Reserve Bank of New York, it may be that things are getting better faster for consumers than it has seemed. Headline inflation is the overall number that is reported. Then there is core inflation, which excludes food and energy, because they can be volatile and throw off a longer-term trend. The Consumer Price Index has a core version, but so does personal consumption expenses, or PCE.

PCE in general is an important figure for economists because it looks at how inflation hits consumers through the goods and services they purchase. Core PCE gets the consumer focus and eliminates the short-term jitters from food and energy markets.

Core PCE is currently at 4.6%, but the New York Fed says that the year-over-year look can be deceiving and so it created a metric called Multivariate Core Trend Inflation that it publishes every month. The new number is 3.5%, a full 110 basis points lower than the traditional measure.

“Why is the MCT estimate so different from twelve-month core inflation rates?” they write. “The MCT model measures the persistent component of month-on-month core inflation data as opposed to its twelve-month rate. This makes it timelier since transitory shocks tend to remain in the twelve-month measure for too long.”

“Additionally, the MCT model gives more weight to sectors that have relatively few transitory shocks (for example, housing and food services and accommodation) and less weight to sectors that have large amounts of noise (for example, motor vehicles and transportation),” they added. “Recently, low inflation readings occurred in sectors with high signal value, leading to downward revisions of their trends, while increases occurred in sectors with low signal value, leaving their trends basically untouched.”

That is, high signal value to the MCT model, with aspects of low signal value for MCT but higher importance to traditional models, not slowing as much.

Not to say that somehow MCT is more important than traditional core PCE because it would seem to support less pressure on interest rates. Both are important to consider. But MCT gives a sense of what is happening now without being masked by some stickier trends that can keep core PCE at seemingly higher levels.

Speaking of a chart in the NY Fed’s post, they said, “the MCT measure takes more signal from the moderation of inflation in food services and accommodation (purple bars) than does core inflation, and less from the moderation of motor vehicle inflation (brown bars).”

“The different contribution of housing inflation (teal bars) is also notable,” they added. “In the run-up, housing inflation has a larger positive contribution to the MCT estimate than to the core PCE measure; during the moderation period, it still adds positive pressure to the core PCE reading, while it contributes to the decline in the MCT measure.”

While there are some stubborn economic sectors that see continuing higher inflation, there is also more moderation happening that may be getting short shrift.

All that said, though, it seems unlikely that the Fed in general will change its course based on a different measure of inflation.